RETIREMENT READ TIME: 3 MIN
Understanding Roth 401(k) Plans for Retirement
What Is a Roth 401(k)?
Roth 401(k) plans combine features of traditional 401(k) plans with those of Roth IRAs. Employers in the U.S. have been allowed to offer Roth 401(k)s since 2006. Unlike traditional 401(k)s, contributions to a Roth 401(k) are made with after-tax dollars. This means there is no tax deduction when you contribute. However, qualified withdrawals of contributions and earnings are generally not subject to federal income tax, provided certain conditions are met.
How Roth 401(k) Withdrawals Work
To take tax-free withdrawals of earnings, the Roth 401(k) account must meet a five-year holding period and withdrawals must occur after age 59½. Other situations, such as disability or death, may also allow tax-free distributions. Employer matching contributions are made with pretax dollars and are subject to income tax upon withdrawal.
Roth 401(k) vs. Traditional 401(k)
Choosing between a Roth 401(k) and a traditional 401(k) depends on your current and anticipated future tax situation. A traditional 401(k) allows pretax contributions, lowering taxable income today, while a Roth 401(k) offers the potential benefit of tax-free withdrawals in retirement. Many employers allow contributions to be split between both plans, subject to overall contribution limits.
Contribution Limits
Roth 401(k) plans share the same annual contribution limits as traditional 401(k)s. For 2025, individuals can contribute up to $23,500, and those aged 50 and older can contribute an additional $7,500 in catch-up contributions. These limits are cumulative across all accounts with the same employer. For example, you cannot contribute $23,500 to a traditional 401(k) and another $23,500 to a Roth 401(k) with the same employer in the same year.
Income and Eligibility Considerations
Unlike Roth IRAs, Roth 401(k)s do not have income restrictions. This can be advantageous for higher-income individuals who exceed Roth IRA income limits. Roth IRA contributions for 2025 phase out at $165,000 for single filers and $246,000 for married couples filing jointly.
Employer Contributions and Tax Treatment
Employer matches in a Roth 401(k) are contributed with pretax dollars and are placed in a separate account. These funds are subject to ordinary income tax upon distribution. Understanding the tax treatment of both contributions and employer matches is important for effective retirement planning.
Additional Considerations
Roth 401(k) plans are subject to required minimum distributions (RMDs) starting at age 73. Traditional 401(k) withdrawals are also taxed as ordinary income and may be subject to a 10% federal penalty if taken before age 59½, except in certain circumstances.
Deciding whether a Roth 401(k) aligns with your retirement strategy involves evaluating tax implications, income level, and contribution flexibility. Consulting a qualified tax or financial professional can help ensure that your approach matches your overall financial goals.
